No Standard for Retirement Readiness

Retirement readiness serves as a strong indicator of retirement plan health. As discussed in Corporate Insight’s recent plan-level data report, readiness is a highly variable metric though is generally defined numerically through projected income replacement ratio and other related markers. What constitutes a healthy minimum income replacement ratio, however, is less than agreed upon as firms tend to define readiness on their own terms. Income replacement, fund diversification and contribution data indicate whether participants will have enough money, maintain the right amount of risk and take full advantage of employer matches and IRS limits. Together, these three indicators paint a picture of retirement readiness—or lack thereof.

As plan health data continues to grow in the retirement plan sponsor space, so too does the need for clear and uniform retirement readiness data and tools. Retirement readiness is considered a critical marker for determining whether plan participants are preparing properly for retirement. Income replacement is one factor in this wide-ranging concept that classifies plan participants’ preparedness and habits, but some firms consider fund diversification just as critical while others incorporate factors that are considerably less quantifiable. All metrics, however, prove highly variable across firms, and an industry standard that clearly defines retirement readiness remains out of reach.

CUNA Mutual Income Projection Tool and Methodology Link

Many firms in our RPM-I coverage set offer a variation of an income projection tool or rating, which allows participants to enter relative information and then calculate what they can expect to have over the years in retirement. A recent PLANSPONSOR article (login required) cites the Congressional Budget Office when asserting that, although considered an industry standard, a 70% income replacement ratio “might not be appropriate for all.” Despite PLANSPONSOR’s dubbing 70% the norm, acceptable goal ratios fluctuate across plan sponsor sites. Some sites call a 70% income replacement ratio sufficient, while others consider the same ratio “off track” for a healthy retirement. Voya Financial falls into the former category, classifying 70% as an “on track” income replacement, whereas Charles Schwab requires a minimum 90% for that same classification. Principal color-tiers participants on track to attain 0-49% replacement as red, while yellow represents 50-69% and green is reserved for 70% and above. The wide range of acceptable replacement ratios alone represents a missing industry benchmark for retirement readiness data.

Principal Retirement Readiness Quick View and Methodology Lightbox

Voya Financial defines a properly diversified portfolio as one with at least one fixed fund, one U.S. fund, one non-U.S. fund and less than 20% in company stock when applicable. CUNA Mutual determines whether participants’ investment mixes are appropriately diversified by comparing them to benchmark portfolios based on time until retirement. Wells Fargo considers participants properly diversified when they hold a target maturity, age-based or balanced fund. While firms are similar when quantifying retirement readiness and its key indicators, the range of metrics used causes confusion. If industry leaders wish to improve overall plan health, benchmarking retirement readiness data would be a good place to start. Such data must then be universally quantifiable and definable to reduce confusion surrounding true preparedness.